Homeowners' Deductions: Economic Boost Or Burden?

And now to matters of personal finance. As we head to the last lap of the election, you might be getting familiar by now with some of the issues being talked about over and over again by the candidates.

One issue that might have caught your attention, especially if you are a homeowner or a would-be homeowner, is what might happen to the mortgage interest tax deduction. That lets homeowners deduct the interest they pay on home loans from their taxes. On average, it lowers people's tax bills by about $600 a year, but as you might imagine, it's one of the country's best known and most fiercely defended tax deductions But now, because of the country's deficit, critics are coming forward and they might be getting a hearing.

Here to tell us more about this is NPR's senior business editor, Marilyn Geewax. Welcome back. Thanks so much for joining us.

MARILYN GEEWAX, BYLINE: Hi, Michel.

MARTIN: So how did the mortgage interest tax deduction start? I mean, I think it's been around so long, people think it was probably here at the founding of the republic, but that's not the case.

GEEWAX: Well, pretty close. It's been around since 1913, so any time something has been around for a century, it's going to have a lot of defenders. I mean, this is basically baked into our economic cake. We know it's there and that's really probably the strongest argument for it is that the housing market is used to it. The housing market is starting to come back. Why disrupt something when the market is fragile and they just want to keep it growing with this deduction in place?

MARTIN: And so what are the arguments against it?

GEEWAX: Well, the people who are opposed to it point out that economists generally hate this deduction. They point out that most countries don't offer this and there's a reason for that. It helps subsidize the rich, you might say, at a time when we have these huge budget deficits. People who are millionaires can go out and borrow huge amounts of money for an extravagant home and, effectively, the taxpayers are subsidizing their extravagance. A lot of people say you can't...

MARTIN: Well, it costs - what? About $100 billion a year?

GEEWAX: Well, the estimates are anywhere from $83 billion a year to $100 billion a year and that's pretty - even by Washington standards, that's a lot of money. So when you're fighting budget deficits, does it make sense to have that big of a deduction?

There are other critics that say these deductions encourage people to take on more debt than they really should, and it discriminates against renters who don't get that deduction. So there's the question, why should government be in the business of pushing you to decide whether to be a homeowner or a renter instead of letting economics dictate that? So they noticed that, you know, since 2007, there are an awful lot of people who are underwater on their homes.

The economy actually might be a lot better off if people felt like - hey, I see a job opportunity in another state. I'm going to up and move. If they were renters, they could move more easily. If they're in a house that's - the value of it has plunged and they don't feel like they can unload it, then they really become stuck in place and unable to grow with the economy.

MARTIN: So are the key arguments that are getting traction now that it's bad economic policy or that it's bad public policy, that it's bad social policy, that it - you know, it subsidizes one product over another, that it basically forces people into certain lifestyle choices that may or may not be as favorable as we've been led to believe. So what's the argument that's getting the most traction?

GEEWAX: Well, basically, the two sides of the argument boil down to economists say it's bad economic policy to push people towards making one choice or the other. Social critics say it discriminates against renters, and supporters say, hey, housing is the foundation of this economy. Millions of people take advantage of this one tax deduction. Leave the middle class alone.

About two out of three people who itemize and do take deductions are people who take this. They make less than $100,000 a year. So it really is focused on an awful lot of middle-class people.

MARTIN: What are the candidates saying about this? And if you're just joining us, we're speaking with NPR's senior business editor, Marilyn Geewax. We're talking about the debate - and it's a surprisingly vigorous one - over whether to keep or get rid of the mortgage interest tax deduction. So what are the candidates saying, Marilyn?

GEEWAX: Well, Governor Romney has a proposal where he says what we should have is a bucket of deductions that is capped at a certain level. First, he said $17,000 and then, later, he has thrown out the figure of $25,000, but he's just, you know, offering an example there. And he says you could throw into that bucket of deductions whatever works for you. If you want to take the home mortgage deduction, have at it, but maybe you're a renter and what's important to you is charitable deductions, so you can take those deductions.

You can take all the deductions you want until you hit $25,000 and then that would be the end of it and that would make sure that we're not just endlessly subsidizing the wealthiest Americans.

MARTIN: So because, presumably, wealthier Americans who generally invest in more housing are taking a lot more...

GEEWAX: A lot more than the $25,000.

MARTIN: ...than that. So that would bring down the amount that they could get.

GEEWAX: Exactly.

MARTIN: OK.

GEEWAX: And President Obama has a different approach. He's saying, don't touch the mortgage deduction at all, except for people who are over $250,000 a year in income. So, he also is talking about kind of a cap.

MARTIN: What do other countries do? I mean, there are countries that have economies similar to the United States. What do they say? I mean, because the argument in favor of the mortgage interest deduction for so long has been it helps stabilize communities because, you know, if you are owners, you're more likely to be invested in your community. Remember, this was one of the signature initiatives in the George H.W. Bush administration in the housing side. I mean, former housing secretary, Jack Kemp, was such a huge believer in home ownership that he was encouraging the government to sell public housing to residents. So the argument is that it stabilizes communities and so forth.

GEEWAX: Other democracies don't have that experience. For example, Canadians don't do this and yet, you know, pretty vigorous democracy and lots of people own homes. We're actually sort of an outlier. This is not a common tax deduction in other countries, but realtors and supporters of it would argue this is an unusual country. The United States has always focused on the idea of owning your own piece of land, that everybody should have a home and that that's a very big part of the American dream.

So they hearken back to that and just say, look, we've been doing this for 100 years. It's helped create a middle class. People own homes here. This is just the way we do things in America and it shouldn't change.

MARTIN: Why is it that economists seem to be pretty - I would not say united on this point, but there seems to be a growing consensus among economists that this is bad public policy, this is bad economic policy.

GEEWAX: Well, we have to make choices among different kinds of ways of dealing with the budget deficit and they say this is a good one to go after because it really doesn't make all that much economic sense in today's climate to continue to push this. For example, one might argue that, yes, the American dream of the 1950s was to buy a home, but if you talk to young people today, their American dream might be quite different. What they really want is a great education and mobility so that they could pursue the jobs they want.

So, if you ask many young people, would you prefer having government help you with buying a home or paying down your student debt or going to college more cheaply, an awful lot of young people would say, hey, please, support me on going to college and getting a U-Haul so that I can move to where the jobs are. That's where they're looking for help now and they say that's where the American dream is, is maximizing your skills and your education and your mobility, not just having a house in the suburbs. So I think maybe, with young people, there is a wedge there.

And one last point is that interest rates are so low right now that one could argue this is a good time to start to phase out the mortgage deduction because interest rates have, in effect, given you a lower monthly payment. It would be less painful to do it now than to wait until interest rates go up.

MARTIN: Something to keep an eye on.

GEEWAX: Yes.

MARTIN: Definitely. Marilyn Geewax is NPR's senior business editor. She was kind enough to join us once again in our studios in Washington, D.C. Thanks again, Marilyn.